Multiple-year hedges recommended

The USDA will update their long range U.S. crop projections this week. Any changes from the November time frame will be made when they put together the Feb. 13 released numbers and this week when they release them to the press in the Annual Ag Outlook extravaganza.

Long range forecasts put out by USDA Feb. 13 indicate a significant decline in price averages for grains in 2012/13. That includes a drop in corn price from $6.70 this year to $5 next year and $4.30 in 2013/14. Wheat prices drop from $7.40 this year to $6 next year and $5.75 the following year. Soybeans drop from $12.60 this year to $11 next year, and to $10.30 in 2013/14.

Thereafter, prices recover somewhat. But, that highlights the fact that current high prices might be an anomaly, and prices aren't likely to stay there for long. These drops are precipitated by a return to 'normal' stocks levels for corn of 1.623 mb next year, with a recovery of yield to 'trend' and a 2 million acre hike in acreage (actually that is smaller than most private estimates).

Actually, Pro Ag expects even more bearish numbers to be released in this week's update. First of all, the November estimates used only a 2 million acre hike in planted acreage of US crops in 2012. Actually, Pro Ag expectations are about 11 million acres (about 9 million less PP acreage in the Dakotas, MN, and MT) and another 2 million of

pasture/broken up ground. That hike in acreage should be spread out over corn, soybeans, and other spring planted crops as obviously the additional acreage needs to go somewhere. In addition, the soybean carryout number has grown by about 80 mb since the Nov report (the carry-in number), and that is going to pressure grains once that information is known by all.

As we've said before, this is exactly the reason Pro Ag has been encouraging hefty hedges of corn, soybeans, and wheat in multiple year hedges. The outlook is for a response of larger supplies and a cut in demand due to recent high prices, as we go forward in the next few years.

The only thing that could derail this projection is another poor crop year (like the US suffered in 2011, with corn -9% from trend yields and soybeans -5%). But the likelihood of that happening might be slim (10% or less?).